The Ladyfern legend: huge reserves, frenzied drilling, and no one made money. Sound familiar?

North America is presently in a comfortable natural gas supply position. This is due to the rapid development of shale gas reserves. While shale deposits have been known about for decades, recent rapid changes in technology unlocked huge amounts of gas at moderate prices. New fracking techniques and more efficient capital usage enabled rapid development of these huge reservoirs. Production has indeed increased dramatically, and well productivity has also boomed. It’s almost like a miracle.

But is it too good to be true? History provides a few excellent examples of the dangers of getting too starry-eyed by banking on seemingly endless natural gas reservoirs. The historical cautionary tale that follows usually involves a gold-rush mentality that results in efforts to extract the entire reservoir all at once!

As an example, consider the legendary Ladyfern field in British Columbia. It is now about 16 years since the natural gas field last made big news. and who’s story has an ugly lesson worth remembering.

The Ladyfern field was a giant gas reservoir estimated to contain up to a trillion cubic feet of recoverable reserves. There were wells that produced at initial rates of 70 million cubic feet per day. And it’s worth remembering that those rates were from vertical wells without fifty stage fracking technology. After the initial discovery, companies raced to buy up mineral rights in the area, and once secured, the race was on.

What happened next can be best described as a medieval-like ‘tragedy of the commons’: a situation where individual entities acting in their best interests create a situation that is detrimental to all. The ‘commons’ in the medieval case refers to overgrazing of a common area that provided forage for various British beasts. The eerily similar parallel in British Columbia saw corporate beasts devour a beautiful gas reservoir like wild pigs upending a garden.

The problem was competitive drainage. Because the Ladyfern reservoir was so porous and prolific, it was in a company’s best interest to drain their reserves as fast as possible or lose them to competitors. As noted in the linked article above, had one company owned all the mineral rights, the reservoir would most likely have been developed more cautiously, or at the very least with a plan. If the competitive drainage phenomena were to have been avoided, reserve recoveries would most certainly have been higher and with far less capital investment.

Maximizing recoveries from a reservoir should be the primary concern, not booming discovery wells that generate hysteria and a “shoot first, aim later” mentality.

In a contemporary sense, this lesson should not be lost on those for whom the latest Utica production test results bring levels of excitement akin to the Ladyfern era.

While there are obvious differences in reservoir characteristics between shale formations and the Ladyfern, the mechanics and philosophy of ultimate recovery remain the same. In particular, in new fields or non-homogenous fields being explored and developed, paying attention to the overall field recovery should be one of the most important considerations. But this parameter can quite easily be forgotten by (or fail to even enter the minds of) executives under pressure to deliver production growth and/or meet quarterly expectations. What’s worse, with the current extreme duress in industry, pressure mounts to keep drilling wells and bringing them on to shore up reserve bases to keep bankers happy. While this strategy can serve as a useful short term survival tactic, more often it equates to bad news in the long run. But on the other hand, it may be the only option for companies that are trying to stay alive until the next price spike.

It may not be fair or kind to chastise over-enthusiastic companies at this abysmal point in the commodity price cycle, but the present circumstances don’t excuse the squandering of valuable resources. To borrow a phrase from BP CEO Bob Dudley, who was referring to something else entirely (and you can surely guess what), “ It will be incumbent on everyone…to ensure that a tragedy like this can never happen again.” Ladyfern was a huge, mismanaged resource that never made anyone any money. In 5 years we may say the same of other giant new plays that are presently being drilled up at a loss.

This article is Part I of a two part series exploring recent examples and implications of frenzied reservoir development. Part II will be published next week.